SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 -------------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________________________ to ______________________ Commission File Number: 1-11806 --------------------------------------------------------- Ethan Allen Interiors Inc.; Ethan Allen Inc.; Ethan Allen Finance Corporation; Ethan Allen Manufacturing Corporation; Andover Wood Products Inc. (Exact name of registrant as specified in its charter) Delaware 06-1275288 (State or other jurisdiction of incorporation (I.R.S. Employer ID No.) or organization) Ethan Allen Drive, Danbury, Connecticut 06811 (Address of principal executive offices) (203) 743-8000 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 28,765,808 at March 31, 1998 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY INDEX PAGE ---- Part I. Financial Information: Item 1. Consolidated Financial Statements as of March 31, 1998 (unaudited) and June 30, 1997 and for the three and nine months ended March 31, 1998 and 1997 (unaudited): Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Cash Flows 4 Consolidated Statements of Shareholders' Equity 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II. Other Information: 15 Item 1. Legal Proceedings Item 2. Changes in Securities Item 6. Exhibits and reports on Form 8-K ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Consolidated Balance Sheets (Dollars in thousands)
March 31, ASSETS 1998 June 30, (unaudited) 1997 ----------- ---- Current assets: Cash and cash equivalents $ 24,909 $ 21,866 Short term investments -- 17,975 Accounts receivable, less allowances of $2,022 and $1,903 at March 31, 1998 and June 30, 1997, respectively 33,438 32,232 Notes receivable, current portion, less allowances of $20 and $74 at March 31, 1998 and June 30, 1997, respectively 540 1,056 Inventories (note 4) 115,764 107,525 Prepaid expenses and other current assets 9,148 6,724 Deferred income taxes 7,150 7,353 --------- --------- Total current assets 190,949 194,731 --------- --------- Property, plant and equipment, net 182,127 171,406 Notes receivable, net of current portion, less allowance of $186 and $145 at March 31, 1998 and June 30, 1997, respectively 1,977 2,725 Intangibles, net of amortization of $14,649 and $13,414 at March 31, 1998 and June 30, 1997, respectively 51,184 52,419 Deferred financing costs, net of amortization of $2,222 and $1,916 at March 31, 1998 and June 30, 1997, respectively (note 3) 689 1,560 Other assets 4,133 4,943 --------- --------- Total assets $ 431,059 $ 427,784 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital lease obligations $ 907 $ 1,119 Accounts payable 50,442 41,172 Accrued expenses 6,840 8,036 Accrued compensation and benefits 14,369 12,983 --------- --------- Total current liabilities 72,558 63,310 --------- --------- Long-term debt, less current maturities (note 3) 11,519 64,066 Obligations under capital leases, less current maturities 1,690 2,700 Other long-term liabilities, principally long-term compensation, environmental and legal reserves 778 815 Deferred income taxes 31,664 31,459 --------- --------- Total liabilities 118,209 162,350 --------- --------- Commitments and contingencies (note 5) -- -- Shareholders' equity: Class A common stock, par value $.01, 70,000,000 shares authorized, 29,617,369 and 29,465,400 shares issued and outstanding at March 31, 1998 and June 30, 1997, respectively 296 294 Preferred stock, par value $.01, 1,055,000 shares authorized, no shares issued and outstanding at March 31, 1998 and June 30, 1997, respectively -- -- Additional paid-in capital 261,710 257,684 --------- --------- 262,006 257,978 Less: Treasury stock (at cost) 851,561 and 700,032 shares at March 31, 1998 and June 30, 1997, respectively (15,589) (10,440) --------- --------- 246,417 247,538 Retained earnings 66,433 17,896 --------- --------- Total shareholders' equity 312,850 265,434 --------- --------- Total liabilities and shareholders' equity $ 431,059 $ 427,784 ========= =========
See accompanying notes to consolidated financial statements 2 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Consolidated Statements of Operations (Unaudited) (Dollars in thousands, except per share data)
Three Months Nine Months Ended March 31, Ended March 31, 1998 1997 1998 1997 ------- ---------- ---------- ------ Net sales $ 171,434 $ 144,719 $ 496,671 $ 415,404 Cost of sales 91,030 81,411 264,788 237,597 --------- --------- --------- --------- Gross profit 80,404 63,308 231,883 177,807 Operating expenses: Selling 28,338 22,965 81,232 61,000 General and administrative 20,743 17,792 63,255 56,204 --------- --------- --------- --------- Operating income 31,323 22,551 87,396 60,603 --------- --------- --------- --------- Interest and other miscellaneous income, net 1,084 577 2,886 921 Interest expense 1,166 1,595 3,960 4,606 Amortization of deferred financing costs 95 102 306 459 --------- --------- --------- --------- Income before income taxes and extraordinary charge 31,146 21,431 86,016 56,459 Income tax expense 12,353 8,582 34,098 22,600 --------- --------- --------- --------- Income before extraordinary charge 18,793 12,849 51,918 33,859 Extraordinary charge, net of tax 802 -- 802 -- --------- --------- --------- --------- Net income $ 17,991 $ 12,849 $ 51,116 $ 33,859 ========= ========= ========= ========= Per share data (note 8): Basic earnings per common share: Net income before extraordinary charge 0.65 0.45 1.81 1.18 Extraordinary charge, net of tax (note 3) (0.03) -- (0.03) -- --------- --------- --------- --------- Net income $ 0.62 $ 0.45 $ 1.78 $ 1.18 ========= ========= ========= ========= Basic weighted average common shares outstanding 28,738 28,805 28,731 28,747 Diluted earnings per common share: Net income before extraordinary charge 0.64 0.44 1.76 1.16 Extraordinary charge, net of tax (note 3) (0.03) -- (0.03) -- --------- --------- --------- --------- Net income $ 0.61 $ 0.44 $ 1.73 $ 1.16 ========= ========= ========= ========= Diluted weighted average common shares outstanding 29,595 29,263 29,423 29,271
See accompanying notes to consolidated financial statements. 3 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands)
Nine Months Ended March 31, 1998 1997 ---------- ------- Operating activities: Net income $ 51,116 $ 33,859 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,945 12,725 Provision for deferred income taxes 408 1,824 Other non-cash charges 56 421 Extraordinary charge, net of tax 341 -- Change in: Accounts receivable (1,218) (798) Inventories (8,239) 5,002 Prepaid and other current assets (2,424) (613) Other assets (865) (114) Accounts payable 10,886 4,545 Accrued expenses 313 (630) Other long-term liabilities (37) (204) -------- -------- Net cash provided by operating activities 62,282 56,017 -------- -------- Investing activities: Proceeds from the disposal of property, plant and equipment 812 110 Proceeds from the disposal of property, plant and equipment, held for sale -- 1,945 Capital expenditures (20,431) (15,108) Payments received on long-term notes receivable 1,352 949 Disbursements made for long-term notes receivable (77) (777) Redemptions of short term securities 30,270 -- Investments in short term securities (12,295) -- -------- -------- Net cash used by investing activities (369) (12,881) -------- -------- Financing activities: Redemption of senior notes (52,543) (9,384) Payments on revolving credit facilities -- (21,500) Borrowings on revolving credit facilities -- 14,500 Other long-term borrowings 111 794 Payments on long-term debt, including current maturities (112) (118) Payments under capital leases (1,226) (1,547) Issuance of capital stock 2,636 1,407 Payments to acquire Treasury stock (5,149) (2,198) Increase in deferred financing costs -- (173) Payment of dividends (2,587) (1,725) -------- -------- Net cash used by financing activities (58,870) (19,944) -------- -------- Net increase in cash and cash equivalents 3,043 23,192 Cash and cash eqivalents at beginning of period 21,866 9,078 -------- -------- Cash and cash equivalents at at end of period $ 24,909 $ 32,270 ======== ========
See accompanying notes to consolidated financial statements. 4 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Consolidated Statements of Shareholders' Equity Nine Months Ended March 31, 1998 (Unaudited) (Dollars in thousands)
Additional Common Paid-in Treasury Retained Stock Capital Stock Earnings Total ----- ------- ----- -------- ----- Balance at June 30, 1997 $ 294 $ 257,684 $ (10,440) $ 17,896 $ 265,434 Issuance of common stock 2 2,634 -- -- 2,636 Purchase of 151,529 shares of treasury stock -- -- (5,149) -- (5,149) Tax benefit associated with the exercise of employee options and warrants -- 1,392 -- -- 1,392 Dividends declared -- -- -- (2,579) (2,579) Net income -- -- -- 51,116 51,116 --------- --------- --------- --------- --------- Balance at March 31, 1998 $ 296 $ 261,710 $ (15,589) $ 66,433 $ 312,850 ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 5 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (1) Basis of Presentation Ethan Allen Interiors Inc. (the "Company") is a Delaware corporation incorporated on May 25, 1989. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Ethan Allen Inc. ("Ethan Allen") and Ethan Allen's subsidiaries. All of Ethan Allen's capital stock is owned by the Company. The Company has no other assets or operating results other than those associated with its investment in Ethan Allen. (2) Interim Financial Presentation All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. In the opinion of the Company, all adjustments, consisting only of normal recurring accruals necessary for fair presentation, have been included in the financial statements. The results of operations for the three and nine months ended March 31, 1998, are not necessarily indicative of results for the fiscal year. (3) Extraordinary Charge On March 15, 1998, the Company completed its optional early redemtion of all of its $52.4 million outstanding 8-3/4% Senior Notes, due on March 15, 2001, at 101.458% of par value. As a result of the early redemption, an extraordinary charge of $.8 million or $0.03 a share, net of tax benefit, was recorded. The extraordinary charge included the write-off of unamortized deferred financing costs associated with the Senior Notes and the premium related to the early redemption. (4) Inventories Inventories at March 31, 1998 and June 30, 1997 are summarized as follows (dollars in thousands): March 31, June 30, 1998 1997 ---- ---- Retail merchandise $ 37,285 $ 34,478 Finished products 29,719 32,665 Work in process 15,679 13,333 Raw materials 33,081 27,049 ------- ------- $115,764 $107,525 ======= ======= (5) Contingencies The Company has been named as a potentially responsible party ("PRP") for the cleanup of four sites currently listed or proposed for inclusion on the National Priorities List ("NPL") under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). Numerous 6 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) other parties have been identified as PRP's at these sites. Liability under CERCLA may be joint and several. The Company has total reserves of $500,000 applicable to these sites, which the Company believes is sufficient to cover any resulting liability. With respect to all of these sites, the Company believes that it is not a major contributor based on the very small volume of waste generated by the Company in relation to total volume at the site. The Company has concluded its involvement with one site and has settled as a de-minimis party. For two of the sites, the remedial investigation is ongoing. A volume-based allocation of responsibility among the parties has been prepared. With respect to the fourth site, a consent decree to finally resolve the matter with the EPA has been signed. The Company believes there may be some delay in resolution due to objections of a non-signatory to the consent decree. (6) Wholly-Owned Subsidiary The Company owns all of the outstanding stock of Ethan Allen, has no material assets other than its ownership of Ethan Allen stock, and conducts all significant operating transactions through Ethan Allen. The Company has guaranteed Ethan Allen's obligations under its Credit Agreement and has pledged all the outstanding capital stock of Ethan Allen to secure its guarantee under its Credit Agreement. The condensed balance sheets of Ethan Allen as of March 31, 1998 and June 30, 1997 are as follows (dollars in thousands): March 31, June 30, 1998 1997 ---- ---- Assets Current assets $190,935 $194,704 Non-current assets 258,855 244,880 ------- ------- Total assets $449,790 $439,584 ======= ======= Liabilities Current liabilities $ 71,634 $ 62,398 Non-current liabilities 45,651 99,040 ------- ------- Total liabilities $117,285 $161,438 ======= ======= 7 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) A summary of Ethan Allen's operating activity for the three and nine months ended March 31, 1998 and 1997, is as follows (dollars in thousands): Three Months Nine Months Ended March 31, Ended March 31, 1998 1997 1998 1997 -------- -------- -------- ------ Net sales $171,434 $144,719 $496,671 $415,404 Gross profit 80,404 63,308 231,883 177,807 Operating income 31,373 22,577 87,487 60,665 Interest expense 1,166 1,595 3,960 4,606 Amortization of deferred financing costs 95 102 306 459 Income before income tax expense and extraordinary charge 31,196 21,457 86,107 56,520 Extraordinary charge (net of tax) 802 - 802 - Net income $ 18,041 $ 12,875 $ 51,207 $ 33,920 (7) Business Reorganization The Company implemented a business reorganization ("Reorganization") effective July 1, 1995, which permitted a separation of manufacturing operations from distribution and store operations. The Company believes that the separation of manufacturing operations from distribution and store operations provides for improved measures of performance including profitability of operations and return on assets, by allowing the Company to more easily allocate income, expenses and assets to the separate operations of the Company's business. The Reorganization consisted principally of the following elements: (i) the contribution of Ethan Allen's manufacturing equipment to Ethan Allen Manufacturing Corporation ("EAMC"), which is a wholly owned subsidiary of Ethan Allen, (ii) EAMC entered into operating lease arrangements with Ethan Allen for real property used in manufacturing operations, (iii) the contribution by Ethan Allen of certain of Ethan Allen's trademarks and service marks, design patents and related assets to Ethan Allen Finance Corporation ("EAFC") which is a wholly owned subsidiary of Ethan Allen, (iv) the full and unconditional guarantee on a senior unsecured basis of Ethan Allen's obligations under Ethan Allen's Credit Agreement by each of EAMC and EAFC and Andover Woods Products Inc. ("Andover"), a wholly owned subsidiary of Ethan Allen, (v) the execution of a management agreement and a service mark licensing agreement between Ethan Allen and EAFC, (vi) the execution of a management agreement and a trademark licensing agreement between EAMC and EAFC and (vii) the execution of a manufacturing agreement between Ethan Allen and EAMC. Ethan Allen continues to own its headquarters building in Danbury, Connecticut, the real property associated with EAMC's manufacturing operations and the assets and liabilities associated with the current Ethan Allen-owned retail operations and Ethan Allen's distribution, service and home delivery operations. 8 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) The summarized historical combined balance sheet information for the Guarantor Subsidiaries at March 31, 1998 and at June 30, 1997 is as follows (dollars in thousands): March 31, June 30, Assets 1998 1997 ------ ----------- ------- Current assets $124,620 $ 85,355 Non-current assets 171,428 168,540 ------- ------- Total assets $296,048 $253,895 ======= ======= Liabilities Current liabilities $ 36,300 $ 28,160 Non-current liabilities 16,831 16,893 ------- ------- Total liabilities $ 53,131 $ 45,053 ======= ======= Summarized historical combined operating activity of the Guarantor Subsidiaries for the three and nine months ended March 31, 1998 and 1997 is as follows (dollars in thousands): Three Months Nine Months Ended Ended March 31, March 31, 1998 1997 1998 1997 -------- -------- -------- ------ Net sales $104,594 $ 93,110 $299,965 $255,292 Gross profit 21,881 18,980 66,912 50,836 Operating income 17,173 14,502 53,269 37,310 Income before income taxes 18,220 15,613 56,439 40,630 Net income $ 11,005 $ 9,446 $ 34,089 $ 24,581 The summarized historical financial information for the Guarantor Subsidiaries above, has been derived from the financial statements of the Company. (8) Earnings Per Share During the quarter ended December 31, 1997, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128 9 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) "Earnings Per Share", which requires a dual presentation of basic and diluted earnings per share. All prior period earnings per share data has been restated to conform with SFAS No. 128. The computation of basic and diluted earnings per share is presented below, in thousands, except per share data:
Three Months Nine Months Ended Ended March 31, March 31, 1998 1997 1998 1997 -------- -------- -------- ------ Basic weighted average common shares outstanding 28,738 28,805 28,731 28,747 Net effect of potential commom stock 857 458 692 524 ------ ------ ------ ------ Diluted weighted average common shares outstanding 29,595 29,263 29,423 29,271 ====== ====== ====== ======
10 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Ethan Allen's revenues are primarily comprised of wholesale sales to dealer-owned stores and retail sales of Ethan Allen-owned stores as follows (dollars in millions): Three Months Nine Months Ended Ended March 31, March 31, 1998 1997 1998 1997 -------- -------- -------- ------ Revenues: Net wholesale sales to dealer-owned stores $108.7 $100.9 $310.7 $275.4 Net retail sales of Ethan Allen-owned stores 58.3 39.1 172.0 123.5 Other revenues 4.4 4.7 14.0 16.5 ----- ----- ----- ----- Total $171.4 $144.7 $496.7 $415.4 ===== ===== ===== ===== Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Sales for the three months ended March 31, 1998 increased by $26.7 million, or 18.5%, over the corresponding period in the prior year to $171.4 million. Net sales to dealer-owned stores increased by 7.7% to $108.7 million, and net retail sales by Ethan Allen-owned stores increased by 49.5% to $58.3 million. The increase in sales to dealer-owned stores has resulted from increased sales from increased distribution through relocated and new stores, improved effectiveness of existing stores, new product offerings, and expanded national television advertising. At March 31, 1998, there were 309 total stores, of which 243 were dealer-owned stores, as compared to 295 total stores, of which 230 were dealer-owned, at March 31, 1997. The increase in retail sales by Ethan Allen-owned stores is attributable to a 33.6%, or $12.6 million, increase in comparable store sales, and an increase in sales generated by newly opened or acquired stores of $7.3 million, partially offset by closed stores, which generated $0.7 million less in sales in the three months ended March 31, 1998, as compared to the three months ended March 31, 1997. The number of Ethan Allen-owned stores has increased to 66 at March 31, 1998, as compared to 65 at March 31, 1997. Comparable stores are stores that, if newly opened, have been open for at least 15 months. Ethan Allen's retail business is principally special order and minimal net sales are generated during the first three months of operations of newly opened stores. Stores acquired from dealers by Ethan Allen are included in comparable store sales in their thirteenth full month of Ethan Allen-owned operations. Gross profit for the three months ended March 31, 1998 increased by $17.1 million or 27.0% from the three months ended March 31, 1997 to $80.4 million. This increase is attributable to higher sales volume, combined with an increase in gross margin from 43.7% in the three months ended March 31, 1997 to 46.9% in the three months ended March 31, 1998. Gross margins have been favorably impacted by the leverage benefit of higher sales volume, greater manufacturing efficiencies, improvements in manufacturing technology and the higher proportionate share of retail sales relative to total sales. Selling, general and administrative expenses increased $8.3 million from $40.8 million or 28.2% of net sales in the three months ended March 31, 1997 to $49.1 million or 28.6% of net sales in the three months ended March 31, 1998. 11 The primary increase in operating expenses in the quarter arose from a $6.0 million increase in the retail division's expenses due primarily to the higher sales volumes and newer stores. Operating income for the three months ended March 31, 1998 was $31.3 million, (18.3% of sales) as compared to $22.6 million (15.6% of sales) in the prior year quarter. Wholesale operating income was $29.0 million for the three months ended March 31, 1998, compared to $24.0 million in the corresponding prior year quarter. Higher sales combined with higher gross margins favorably impacted wholesale operating income. Retail operating income was $3.5 million in the three months ended March 31, 1998, an increase of $2.9 million from the corresponding period in the prior year. Interest expense, including the amortization of deferred financing costs, for the three months ended March 31, 1998, decreased by $0.4 million to $1.3 million from $1.7 million in the three months ended March 31, 1997. The lower interest expense reflects lower debt balances outstanding. During the quarter ended March 31, 1998, the Company recorded an $.8 million extraordinary charge (net of tax benefit) related to the early retirement of its 8-3/4% Senior Notes due 2001. The extraordinary charge included the write-off of unamortized deferred financing costs and the premium paid related to the early redemption. Income tax expense of $12.4 million or an effective tax rate of 39.7%, was recorded for the three months ended March 31, 1998, compared to $8.6 million or an effective tax rate of 40.0%, in the prior year quarter. For the three months ended March 31, 1998, the Company reported net income of $18.0 million, as compared to net income for the three months ended March 31, 1997, of $12.8 million. Nine Months Ended March 31, 1998 Compared to Nine Months Ended March 31, 1997 Sales for the nine months ended March 31, 1998 increased by $81.3 million or 19.6%, over the nine months ended March 31, 1997 to $496.7 million. Net sales to dealer-owned stores increased by $35.3 million or 12.8% to $310.7 million and net retail sales by Ethan Allen-owned stores increased by $48.5 million or 39.3% to $172.0 million. The increase in sales to dealer-owned stores has resulted from increased distribution through new and relocated stores, a 3.5% wholesale price increase, increased effectiveness of existing stores, new product offerings, expanded national television advertising and an increase in annual sales events from six per year to eight per year. The increase in retail sales by Ethan Allen-owned stores is attributable to a 25.4% or $30.0 million increase in comparable store sales, and an increase in sales generated by newly opened or acquired stores of $20.4 million, partially offset by closed stores which generated $1.9 million less in sales in the nine months ended March 31, 1998 as compared to the nine months ended March 31, 1997. Gross profit for the nine months ended March 31, 1998, increased by $54.1 million from the nine months ended March 31, 1997 to $231.9 million. This increase is attributable to higher sales volume and an improvement in gross margin from 42.8% in the nine months ended March 31, 1997 to 46.7% in the nine months ended March 31, 1998. The gross margin improvement is due to the leverage benefit of greater manufacturing volumes, greater manufacturing efficiencies, the benefit of the 3.5% wholesale price increase and improvements in manufacturing technology. Selling, general and administrative expenses increased $27.3 million from $117.2 million or 28.2% of net sales, in the fiscal 1997 period to $144.5 million 12 or 29.1% of net sales in the fiscal 1998 period. This increase is attributable principally to an increase in operating expenses of the Company's retail division of $15.5 million, due to higher sales volumes and an increase in the number of Ethan Allen-owned stores and an $8.9 million increase in the Company's advertising expenses due to the expanded national television campaign effective January 1, 1997. Operating income for the nine months ended March 31, 1998 was $87.4 million or 17.6% of sales, as compared to $60.6 million or 14.6% of sales for the nine months ended March 31, 1997. Wholesale operating income was $79.2 million for the nine months ended March 31, 1998, an increase of $20.8 million or 35.6% as compared to the prior year. This increase is attributable to higher sales volumes and improved gross margins partially offset by higher operating expenses. Retail operating income was $10.2 million for the nine months ended March 31, 1998, as compared to $4.8 million for the nine months ended March 31, 1997. Interest expense, including the amortization of deferred financing costs, for the nine months ended March 31, 1998 decreased by $0.8 million to $4.3 million from $5.1 million in the prior year period, due to lower debt balances outstanding. Income tax expense of $34.1 million or an effective rate of 39.6%, was recorded for the nine months ended March 31, 1998 as compared to $22.6 million or an effective rate of 40.0%, in the prior year period. For the nine months ended March 31, 1998, the Company recorded net income of $51.1 million, compared to net income for the nine months ended March 31, 1997 of $33.9 million. 13 Financial Condition and Liquidity Principal sources of liquidity are cash flow from operations and additional borrowing capacity under the revolving credit facility. Net cash provided by operating activities totaled $62.3 million for the nine months ended March 31, 1998, as compared to $56.0 million in the nine months ended March 31, 1997. Net income for the nine months ended March 31, 1998 was $17.3 million higher than the net income reported for the nine months ended March 31, 1997. For the nine months ended March 31, 1998, inventories increased $8.2 million as compared to a $5.0 million reduction in the prior year period. Accounts payable increased $10.9 million in the nine months ended March 31, 1998 as compared to a $4.5 million increase in the prior year period. At March 31, 1998, the Company had working capital of $118.4 million and a current ratio of 2.63 to 1. During the nine months ended March 31, 1998, capital spending totaled $20.4 million as compared to $15.1 million in the nine months ended March 31, 1997. Capital expenditures in fiscal 1998 are anticipated to be approximately $27.0 million. The Company anticipates that cash from operations will be sufficient to fund this level of capital expenditures. The current level of anticipated capital spending, which is attributable primarily to manufacturing efficiency improvements and new store openings, is expected to continue for the foreseeable future. Total debt outstanding at March 31, 1998 is $14.1 million. At March 31, 1998, there are no outstanding revolving loans under the Credit Agreement. Trade and standby letters of credit of $12.6 million were outstanding as of March 31, 1998. On March 15, 1998, the Company completed its optional early redemption of all of its $52.4 million outstanding 8-3/4% Senior Notes, due on March 15, 2001, at 101.458% of par value. As a result of the early redemption, an extraordinary charge of $.8 million, net of tax benefit, was recorded. The extraordinary charge included the write-off of unamortized deferred financing costs associated with the Senior Notes and the premium related to the early redemption. As of March 31, 1998, aggregate scheduled maturities of long-term debt for each of the next five fiscal years are $.4 million, $.2 million, $.2 million, $.2 million and $.2 million, respectively. Management believes that its cash flow from operations, together with its other available sources of liquidity, will be adequate to make all required payments of principal and interest on its debt, to permit anticipated capital expenditures and to fund working capital and other cash requirements. The Company may from time to time, either directly or through agents, repurchase its common stock in the open market through negotiated purchases or otherwise, at prices and on terms satisfactory to the Company. Depending on market prices and other conditions relevant to the Company, such purchases may be discontinued at any time. During the nine months ended March 31, 1998, the Company purchased 151,529 shares of its stock on the open market at an average price of $33.98 per share. 14 PART II. OTHER INFORMATION Item 1. - Legal Proceedings There has been no change to matters discussed in Business-Legal Proceedings in the Company's Form 10-K as filed with the Securities and Exchange Commission on September 30, 1997. Item 2. - Changes in Securities There has been no change to matters discussed in Description and Ownership of Capital Stock in the Company's Form 10-K as filed with the Securities and Exchange Commission on September 30, 1997, except as noted on the Form S-8 filed by the Company on March 13, 1998, pursuant to which the Company increased by 1,300,000 the authorized shares reserved for use in connection with the Stock Option Plan. Item 6. - Exhibits and Reports on Form 8-K Exhibits 27. EDGAR Financial Data Schedule Reports on Form 8-K On February 11, 1998, the Company filed a Form 8-K relating to the redemption of the Company's Senior Notes. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ETHAN ALLEN INTERIORS INC. (Registrant) DATE: 5/7/98 BY: /s/ M. Farooq Kathwari ------ ---------------------- M. Farooq Kathwari Chairman of the Board President and Chief Executive Officer (Principal Executive Officer) DATE: 5/7/98 BY: /s/ Edward P. Schade ------ -------------------- Edward P. Schade Vice President & Treasurer (Principal Financial Officer) DATE: 5/7/98 BY: /s/ Gerardo Burdo ------ ----------------- Gerardo Burdo Corporate Controller (Principal Accounting Officer) 16